Once bitten, twice bitten

Monday, October 24, 2005, 11:01

Hungary?s leading politicians appear to be confused about how to respond to repeated criticism from the European Commission (EC) regarding the country?s record-high budget deficit.
Time after time, members of the government issue contradictory statements and fabricate populist scenarios in their attempts to sell the idea that Hungary can fulfill the Maastricht criteria necessary for introducing the euro in 2010, while at the same time promising to make the economy more competitive by lowering taxes and maintaining various social benefits.
Regarding the feasibility of euro introduction in five years? time, Prime Minister Ferenc Gyurcsány and his finance minister, János Veres, have contradicted each other several times in the public media.
Looking at the issue from a purely economic point of view, while lowering taxes could make the economy more competitive in the long run, the immediate impact of such a policy is a steadily growing gap in the budget. Upcoming general elections in 2006 further complicate the situation, as the State Audit Office pointed out last week in its report on the planned budget. The report said the government-proposed budget for next year is unrealistic, despite ambitious attempts to cut public spending.
The EC is hardly less pessimistic, warning last week that Hungary will miss its deficit targets in both 2005 and 2006. This year, the deficit will be significantly higher than the initially projected 3.6%; the government?s new target is 6.1%. Hungary has also revised its 2006 target to 5.2% from 2.9%.
While there have been no significant changes to the original macroeconomic scenario, the EC has taken into account that the planned sale of existing motorways to the state-owned motorway operator (ÁAK), including those still under construction, simply cannot be considered as a deficit-reducing item; nor can the late payment of annual bonuses from 2004 to public sector employees.
Instead, the commission claims that these two considerations will deepen the 2005 deficit by 1.9% and 0.1% of GDP, respectively.
Meanwhile, Viktor Orbán, leader of the opposition Fidesz, says ?the sooner the better? for entry into the euro zone, knowing full well that the issue will prove an election year lightning rod.
Concerning the methods by which Hungary will adopt the common European currency, Orbán has issued his fair share of pie-in-the-sky remarks. The opposition leader says that certain budget items should remain off-limits ? among them the 13th month pension and family tax allowance. Meanwhile, he says he would sharply cut taxes to reduce the size of the gray economy, and pledges to slash the 18% personal income tax rate to 13%.
It all sounds so strangely familiar.

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